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Hi,
I’ve got a question regarding the advancement fee on the revised book value of receivables.
It states that it will advance 80% of the receivables. Therefore, I worked out the revised receivable balance to be:
21,300,000 * 20% * 35/365 = 408,493. My logic behind this is that if they advance 80% of receivables immediately, then only 20% will remain.
However, in the answer, it ignores the 80% advancement in working out receivables, so instead it is:
21,300,000 * 35/365 = 2,042,466.
I can’t quite get my head around this. Thanks for your help.
There is more than one way of showing the workings.
What you are doing is fine, and you can work out the interest saving for a drop in receivables to your figure.
However, then you will also have to show the full cost of the interest payable to the factor.The end result (the net cost or net saving) will be the same.
I’m having great difficulty sending this message. It keeps rejecting it, saying it looks as thought I’ve already said that! I’m hoping it might work this time, after the inclusion of this first bit.
Thanks for your help, I think I understand now! I think my confusion was that I thought for the advancement they were charging 9% of Bold Co’s revised receivables (which is only 408,493). But they were charging 9% of the advancement value weren’t they? Here’s my new workings, I hope it’s right!
Costs.
Advancement 12,300,000 * 35/365 * 80% * 0.09 147,058
Fee 21,300,000 * 0.0125 266,250
Total costs 413,308Savings
Admin 40,000
Bad Debts 21,300,000 * 0.009 191,700
Finance Current Receivables 3,500,000
Revised Rec 21,300,000 * 0,2 * 35/365 = 408,493
Reduction in receivables 3,091,507 * 0.07 216,405
Total Savings 448,105Net Saving = 448,105 – 413,308 = 34,797
Hi, thanks for your help, I think I understand. I’ve been trying to send a longer message with my workings, but it won’t let me send it. It keeps saying “Duplicate reply detected; it looks as though you’ve already said that!”. As far as I can see I haven’t! I hope this message works.
Now it’s let me send the previous post, I’ll have a go at sending this.
Basically, to make my calculations tally with the official answer, I had to charge 9% of the value of the advancement (i.e. 12,300,000 x 35/365 x 80% x 0.09 = 147,058). I thought I had to charge 9% of the revised receivables (i.e. 408,493 x 0.09 = 36,764). I think maybe it’s the wording that has made me confused!
Your revised answer is correct.
The factor only charges interest on the amount advanced – i.e. on the 80%.
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